Hat tip to MB, from the WSJ:
Fitch Ratings forecasts that most borrowers who get lower mortgage payments under a federal government program will default within 12 months.
Among those with loans that aren’t backed by any federal agency, the redefault rate within a year is likely to be 65% to 75% under the Obama administration’s Home Affordable Modification Program, or HAMP, according to a report to be released Wednesday by Fitch, a New York-based credit-rating firm. Almost all of those who got loan modifications have already defaulted once.
Diane Pendley, a managing director at Fitch, said the failure rate was likely to be high largely because most of these borrowers were mired in credit-card debt, car loans and other obligations.
The Treasury Department has said that among people who have been given loan modifications under HAMP, the median ratio of total debt payments to pretax income is still 64%. That often means little money is left over for food, clothing or such emergency expenses as medical care and car repairs.
“The borrower remains in a very high-risk situation,” Ms. Pendley said in an interview. “The other debts don’t go away.”
A Treasury official said HAMP “is making a real difference in the lives of hundreds of thousands of homeowners.” He said the government has reduced the risk of redefault by offering financial incentives to borrowers who remain current on loan payments.
Fitch based the redefault forecast on the performance of loans that were modified in the first quarter of 2009. Those modifications were done outside of HAMP, which took effect later in the year. But Ms. Pendley doesn’t expect a major difference between the results of HAMP modifications and those made under lenders’ programs.
Even if two-thirds of the loan modifications fail, Ms. Pendley said, that doesn’t mean HAMP is a failure. “If you can save one-third of the borrowers, I think it is worth the exercise,” she said.
She also said the HAMP program, announced in early 2009, had provided a basic outline for loan servicers to follow in modifying loans. Loan servicers, often owned by banks, collect payments and handle foreclosures. Previously they were “all over the place” in their methods for dealing with foreclosures, Ms. Pendley said.
At the end of April, about 295,000 households were benefiting from long-term modifications under HAMP, which typically involves cutting the interest rate as low as 2%, according to the Treasury. Another 637,000 households were in trial modifications, under which they need to show they can make their new, lower payments consistently and provide documents proving they are eligible. Under the $50 billion HAMP program, the federal government provides financial incentives to borrowers, loan servicers and mortgage investors for modifying loans.
Andrew Jakabovics, an associate director at the Center for American Progress, a Washington think tank with ties to the Obama administration, said results of HAMP so far were mixed. Borrowers continue to complain that it often takes months, and sometimes more than a year, to get decisions from servicers on whether a loan can be modified on a long-term basis. Mr. Jakabovics said the program would work better if the government dealt directly with applicants for HAMP and decided which ones qualified, rather than delegating that function to servicers.
But Mr. Jakabovics said he didn’t expect major changes in HAMP, which is scheduled to remain in effect through 2012. “For better or worse,” he said, “what we’ve got now is what we’re going to go with.”
Scooped by CR by 15 minutes.
He also had Zach’s report:
Economists and analysts predict redefaults will severely plague loan modifications, including one projection that 70% of all modifications will fail.
In a recent report projecting the level of shadow inventory in the housing market, Standard & Poor’s analysts noted that they assumed a 70% redefault rate on loan modifications in the study.
Diane Westerback, S&P’s managing director of global surveillance analytics, told SNL that the previously reported 30% to 40% redefault rates typically only count borrowers after two or three months of payments. A year after the modification, Westerback expects redefaults to hit between 60% and 70%.
“I’ve always taken the position that if a guy pays for a year, he’s really made it. If he makes a few payments, you don’t really know,” she said.
Ha Ha!
Money shot?
Big question is, if you can only save 1/3 of the borrowers, is it worth the EXPENSE?
Personally, I think many, if not most people are better off NOT owning a house because it is simply too big of a commitment to handle for them. Besides, it diminishes a person’s mobility, which for better or worse, in this economy is the difference between a job and no job for many.
I guess if you believe that we will never have to pay back the money we borrowed to bail out people who didn’t want to be bailed out, or are incapable of saving themselves in the first place, then we’re just fine saving only 1/3 to indentured servitude.
Loan-Mod
Just another way to play “extend & pretend”.
70%…This is wonderful news for all of us tracking the perfect foreclosure property which keeps getting postponed due to the loan mod…eventually (likely between month 6-12) it will end up on the steps, and some of us will end up in great new homes…and JTR will have more stories for his blog…
“If you can save one-third of the borrowers, I think it is worth the exercise,”
Given the state of the housing market, I would say that this is an “exercise” in futility. They never had a chance to stop the freefall and now all we have left to show for all this money spent is a country of deadbeats and freeloaders.
The best HAMP (for the USA) is:
1. Foreclosure. You lose all equity.
2. Someone buys [your former] house for a much more reasonable price.
3. You learn to SAVE money and shift your http://en.wikipedia.org/wiki/Time_preference .
4. You buy again at a reasonable price.
you cant fix stupid as I have heard.
The longer homes are in the hands of the irresponsible the worse shape they will be. The bad news is that they will need a lot of repairs. The good news is that they will be cheaper and the economy will be helped by the needed home improvement. Let’s hope the next congress understands that foreclosure is the solution and not the problem.
Come on, what’ wrong with 30%? If you are successful 30% of the time in baseball they make a statue of your bust in Cooperstown and you are an immortal.
And what is it costing us for this success? $50B, $100B? Des anyone even comprehend how much money these guys are just flushing down the drain?
Wake me up when the adults are in control again, the kids just aren’t getting it done.
SD_Coastal- “And what is it costing us for this success?”
How much do those “successful” baseball players cost?
Completely off topic, but congrats on your Inman News nomination for most innovative blog! You deserve it.
With 2/3 of those redefaulting, can we justify the expense to keep it going? I’d hardly see that as an acceptable rate of success.
Btw, congratulations on the nomination.
This may be economy-related, in that the economy continues to sputter. I’m not sure this data has played out yet. For instance, why did the blue and green lines cross? That doesn’t make any sense.